The team estimated Midwest Manufacturing's incurred but not reported (IBNR) reserves using 7 months of lag factors. For medical claims, the IBNR was estimated at $537,896 and for pharmaceutical claims it was $36,910. Applying the same contingency adjustment expense (CAE) and provision for excess payments (PKEF) percentages as last year of 3.5% and 5% respectively, the total liabilities were estimated to be $583,617 for medical and $40,047 for pharmaceutical. While there was some disparity between this year and last year's trends, overall the trends were similar, supporting the soundness of the estimates.

1. ​MEMO
Date: Nov 15, 2015
To: Midwest Manufacturing Company
From: Team 3 (Qi Zhang, Pengyu Wang, Bingzhuo Yan)
Subject: Midwest Manufacturing’ s IBNR at 9/30/2015
Background
We are requested to consult with Midwest manufacturing about their IBNR at 9/30/2015. To best
project the future liabilities for Midwest Manufacturing we determine the lag factors from our
data so that we could estimate the claims that aren’t fully developed. We use the seven months
truncated method with the nearest seven months’ lag factors for projection of future lag factors.
Calculate the IBNRs for each line of business, the company’s IBNR for medical line of business
is estimated at $537,896, for pharmaceutical line of business is estimated at $36,910.
Analysis
Last year Midwest Manufacturing’s IBNR was estimated at $495,000 with a CAE of $17,325
and a PKEF of $25,616. Using the same percentage for CAE and PKEF from last year, which is
calculated to be 3.5% and 5% respectively, this year’s CAE is calculated as $20,118 and PKEF is
calculated as $29,746. All the numbers from this year are higher than those in the last year,
which is explainable by the increase in memberships enrollment from 1567 last year to 2234 this
year, a 42.6% increase.
IBNR from last year
IBNR 495,000
CAE 17,325 3.50%
PKEF 25,616 5.00%
Total Liab 537,941
IBNR this year
Year 2015 Medical Pharmaceutical
IBNR 537,896 36,910
CAE 18,826 1,291
PKEF 26,894 1,845
Total liab 583,617 40,047

2. Explanation For IBNR calculation and development
● The lag factors are calculated by taking the arithmetic average of last 7 months’
lag factor without high and low.
● The unpaid claims are computed using the lag factors with the known claims.
● The IBNRs are calculated by summing all the unpaid claims beyond 09/30/15.
Explanation for CAE, PKEF
From last year’s data, we can find the percentage of CAE and PKEF:
● CAE = 17325/495000 = 3.50%
● PKEF = 25616/(17325+495000) = 5.00%
Assume this year the same percentages apply in our calculation.
Recast
From the trendline of last year compared to this year’s we can see that there is a larger disparity
in the beginning months in the pharmaceutical claims but elsewhere the data fundamentally
follow the same trend. We think last year’s estimation was also reasonable given all the data we
have. The outcomes follow similar trend which convinces our estimation to be sound.
Conclusion
In conclusion, using arithmetic average of lag factors truncated 7 months, results are:
● IBNR in 2015 for medical and pharmaceutical claims are $537,896 and $36,910.
● The total liabilities of the two lines are $58,367 and $40,047 respectively, given the
assumption that the CAE and PKEF percentage remain the same as last year.
● Data recast shows noticeable disparity but overall trend is similar.
Lastly, I give my words as an actuary given the data provided that the estimates are the right
amount to set aside for Midwest Manufacturing Company as of September 30, 2015.
Qi Zhang, Pengyu Wang, Bingzhuo Yan

3. Reference
UofM 4067W_2015_Fall_Module2 Deloitte
UofM 4067W_2015_Fall_Module2 – Data Requested from Midwest Manufacturing­Book2.xlsx
https://ay15.moodle.umn.edu/mod/resource/view.php?id=649716